Bubbles

by Mike Holman

No this is not about the Trailer Park Boys, but about a new article that William Bernstein of Four Pillars of Investing fame has written here on his website.

He talks about the possibility that we are in a bubble based on a number of factors including over valuation of worldwide stocks and the realization of Hyman Minsky’s criteria for a bubble – liquidity and displacement. By displacement he’s referring to a transformative technology (ie the web) or new financial ideas. Bernstein says that this displacement is occurring with the onslaught of new ETFs on which Larry McDonald wrote about. Personally I would have to respectfully disagree with Bernstein for the simple reason that ETFs have been around since 1990 so they really aren’t a new invention. Index funds which are pretty closely related to ETFs have been around since the mid-seventies. Admittedly there are some exotic flavours of ETFs coming out which leads one to believe that maybe we are in a bubble because apparently any type of investment will sell these days as Canadian Capitalist covers here.

In the end he concludes that the odds are not more 50/50 that we are in a bubble. One of his ideas in his book is that a major bubble only occurs once every generation or about every 30 years because everyone forgets about the last big bubble. In this case it has been too soon since the dot bomb for another bubble to occur.

On the other hand he also mentions in the article “the better you are at tuning out the opinions of others and making judgments for yourself, the wealthier you will be.” So perhaps we just have to make up our own minds on whether there might be a bubble occurring.

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{ 2 comments… read them below or add one }

1 ThickenMyWallet

I can’t comment on whether a bubble is occurring or not but if you read the business pages the hedge funds are beginning to implode one by one. Whether this triggers a larger crisis remains to be seen.

2 FourPillars

Hopefully that won’t happen TMW – it’s one thing to have assets reduce in price naturally ie tech stocks losing most of their “value” in 2000, 2001 but another thing to have an actual financial crisis. I recall the Long Term Capital Management situation (which would make a good post) as being a close call in this respect.

Mike

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